David M. Louie
Attorney General
State of Hawaii
Alaska
3020 mi
California
2500 mi
Indonesia
6800 mi
Tahiti
2600 mi
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1968- Report on the most feasible and expeditious
means of achieving relief from the high price of
gasoline in the State of Hawaii.
1995 – Regulating Hawaii’s Petroleum Industry.
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
1974 –Investigation of the Hawaii Gasoline
Market.

1989 - the Hawaii Attorney General's Office
began investigating the high pump prices of
gasoline that followed the Exxon Valdez oil spill
in Alaska.
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Oct. 2, 1998:
 State filed a $500 million lawsuit against Hawaii's
two refineries and major gasoline wholesalers for
allegedly overcharging local consumers for years.

Named in the lawsuit were 13 corporations,
including Chevron Corp., BHP Hawaii Inc., Shell Oil
Co., Texaco Inc., Tesoro Petroleum Corp., Tosco
Corp. and Unocal Corp.
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
Encroachment/Divorcement legislation
 law limits a refiner's and/or marketer's ability to establish
new company-operated stations within a certain distance
of existing dealer-operated stations.

Lease Rent Cap legislation
 Law imposed limits on rents that a refiner, marketer, or
wholesaler/jobber can charge lessee-dealers for the use of
company-owned stations.
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
March 1999: After successfully defending the oil companies’ motions to dismiss
the state's antitrust suit, the State ups the amount of the lawsuit to $1.8 billion,
saying the companies profited far more than first anticipated.

January 2000: BHP Hawaii Inc. and Tesoro Petroleum Corp. settle the suit and
deny wrongdoing. They pay the state $15 million.

July 2001: The five remaining defendants -- Chevron Corp., Tosco Corp., Texaco
Inc., Shell Oil Co. and Unocal Corp. -- file motions under seal seeking a summary
judgment to dismiss the case.

November 2001: Court hears arguments over the motions for summary
judgment.
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Among the facts uncovered in the litigation were the
following for the period from 1988 to 1995:
Metric
CHEVRON
Hawaii Market
CHEVRON
U.S. Market
Sales Volume
3.1%
96.9%
Profit
21.9%
78.11%
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Chevron's average after-tax return on its
capital investment from gas sales through
dealers:
▪ Hawaii - 20.8%
▪ Los Angeles – 1.9%
▪ San Francisco – 9.8%
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Settled???
Jan. 16, 2002: The State and the defendants reach a
settlement that resulted in a total payment of $20 million to
the State of Hawaii.
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There was strong judicial sentiment that the evidence of
collusion was not more than evidence of TACIT
COLLUSION.
- - - - “Once you decide it’s an oligopoly, you’ve got an
explanation for the phenomenon of the high prices, the
high margins, the high profits, the lack of vigorous price
competition. That explains it all.”
Statement by defense counsel at Summary Judgment hearing held on November 15, 2001.
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
April 2002-the lease rent cap law declared to be an
unconstitutional regulatory taking.
The Court:
The State has a legitimate state interest in lowering
consumer gasoline prices.
[The lease rent cap law] does not substantially
advance this legitimate state interest.
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Lease
Rent $
Increase
wholesale
prices to
offset lost
rental
income
Dealers
will
raise
retail
prices
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Myths of the Hawaii Gasoline Market:
#1 - It costs more to make gasoline in Hawaii than on
the mainland.
False: It costs less.
#2 – Gasoline in Hawaii is in short supply.
False: There is a gasoline surplus and it is being
exported from Hawaii.
#3 – Hawaii is a competitive gasoline market.
False: The Hawaii market is profoundly uncompetitive
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Jet fuel prices in Hawaii tracked California prices:
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But not so for gasoline prices:
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 Imposed wholesale and retail price controls on
regular unleaded gasoline beginning on July 1,
2004.
 The price cap provided the counterbalance to the
lease rent cap.
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STARTING LEGAL PREMISES:

The State has a legitimate state interest in
lowering consumer gasoline prices.

Price regulation is permissible to protect the
consumer welfare
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STARTING FACTUAL PREMISES:

That the participants in the market have chosen to
secure excess profits primarily at the wholesale
level.

That the participants have chosen not to engage in
competition.

That affirmative action is needed to protect the
consumers as well as businesses affected by high
gasoline prices.
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THEORETICAL CONSTRUCT:

That we need BOTH a wholesale price cap and a
lease rent cap because there was an inverse
relationship between wholesale prices and rental
income:
 Chevron indicated that it would increase wholesale prices
to offset reduced rental income via capped lease rent.
 With increased wholesale prices, dealer-lessees must
increase retail prices thereby undermining the efficacy of
the lease rent cap to reduce retail prices.
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The Particulars
 1.
Baseline price
▪ Weekly average of the spot daily pipeline price for
regular unleaded gasoline for 3 markets – LA, SF, and
PNW.
▪ 1 data source for ease of reference – OPIS
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The Particulars
 2.
Location adjustment factor
▪ Reflected the cost to move gasoline in bulk to Hawaii $.04/gallon
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The Particulars
 3.
Marketing margin factor
▪ The gross margin needed to arrive at a net margin
comparable to the West Coast - $.18/gallon
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The Particulars
Baseline
Price
LAF
MMF
Max Pre-tax
Wholesale Price for
Oahu
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The Particulars
 4.
Neighbor island wholesale
adjustment factor
▪ Consisted of 2 components:
a – NI Location Adjustment Factor
-reflects cost to transport fuel to the neighbor
b - NI Marketing Factor
-reflects the cost of marketing including
storage, or distribution costs.
islands
terminaling,
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The Particulars
 Now have 2 maximum wholesale prices:
 1 – Max Pre-Tax Wholesale Price for Oahu
 2 – Max Pre-Tax Wholesale Price for NI
Max Pre-tax
Wholesale Price
for Oahu
NI Wholesale
Adjustment
Factor
Max Pre-tax
Wholesale Price
for NI
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The Particulars
 5.
Retail marketing margin factor
-the retail margin for regular unleaded
gasoline sold on a self-serve basis - $.16/gallon
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Effective date of the price cap law – July 1,
2004
▪ But . . .
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
Removed the retail price cap.

Change in the markets used from LA, SF, and PNW to LA, NY
Harbor, and Gulf Coast.

Created a zone pricing mechanism for 8 zones.

Imposed a wholesale price cap on all grades of gasoline
instead of only on regular unleaded gasoline.

Effective date for the price cap: September 1, 2005
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
The deadliest and most destructive Atlantic
hurricane of the 2005 Atlantic hurricane
season.
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September 5 ,2005:
 34 states had more expensive gasoline than Hawaii.
 Commentator: "If the gas cap hadn't been in place, we
might have been 40th rather than 35th. . . .”
 Critics of the price cap law said Hawaii's prices were
relatively cheap only because the state's gasoline
infrastructure was unaffected by Hurricane Katrina.
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2006:
 The price cap law was suspended indefinitely.
 Empowered the Governor to reinstate the price cap law if
necessary.
 Established a petroleum monitoring program to promote
transparency on the market.
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2006:
 Commentator:
▪ WHEN gasoline prices soared after Hurricane Katrina devastated the Gulf Coast,
many motorists blamed Hawaii's price cap, which was based partly on that region's
prices.
▪ Since Governor Lingle signed legislation that removed the caps, that theory has
been disproved.
▪ In the past five weeks, Hawaii's gas prices, implemented Sept. 1, have returned to
their pre-cap pattern of hovering above mainland prices, unaffected by the dips and
peaks of the marketplace.
▪ If the oligopoly continues to impose artificially high prices through the rest of this
year, legislators should consider reinstating the caps.
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David M. Louie
Attorney General
State of Hawaii
(808) 586-1282
David.m.louie@hawaii.gov
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